Prof. Dr. Lawan Thanadsillap akul Investment Liberalisation under FTAs and Some Legal Issues in International Law Prof. Dr. Lawan Thanadsillapakul.

Prof. Dr. LawanThanadsillapakul

Investment Liberalisation under FTAs and Some Legal Issues in International Law

Prof. Dr. Lawan Thanadsillapakul

Scope of PresentationThe Main issues of Market Liberalization

Understanding the Meaning of FTAThe substances of the New Model of FTA

Investment Liberalization under the Bilateral Investment TreatyState SovereigntyRestriction over entry and establishment

Investment ProtectionDefinition of Investment and InvestorExpropriationFund transferDispute Settlement Mechanism


Ideology

Neo-Liberalism/Neo-Classical- Global Market- Market function- No state intervention- No frontier- No barrier

State and Market Mechanism for balancing State and Market Competition Law and Policy, Anti-Trust Law,

Anti-Monopoly Law

Main Issues of Market LiberalizationImplementation of the Trade and Investment LiberalizationEconomic Theory – Neo Classical – Neo Liberalization

Problematic Issues– Market Failure – Policy Failure

Economic Instruments for Trade and Investment LiberalizationRule – Based Market EconomyPower – Based Market Economy

Capacity Building and the enhancement of competitivenessLevelled Playing FieldUnequal PlayersInequity of the Rule of the game

SWOT Analysis

Understanding the meaning of FTA FTA = Free Trade Area and FTA = Free Trade Agreement

Problematic Issues– The content and context of Free Trade Agreement

The New Model of Free Trade Agreement: Investment LiberalizationThe Differences between Bilateral Investment Agreement and Investment Chapter under Free Trade Agreement

The incorporation of GATT/WTO – Plus requirement into investment chapter

The Market cannot function well under the new FTA modelToo Stringent Intellectual Property Protection such as the prohibition of CL

No clear definition of indirect expropriationThe problem of environment protection

The Replacement of state barriers by Restrictive Business Practices of TNCs

Maintain state sovereignty to control FDI

Admission & Right of Establishment

Restricted areas of investment

Restricted entry and investment

Restricted foreign equity ratio or Limitation on Foreign ownership

Screening process

Control on the operation of foreign investors

Limitation on the type and number of foreign personnel and their duration of stay

Limitation on ownership of land

Requirement that domestic residents be part of board of directors and requirement to implement investment measures

Investment liberalization under BITs Prof. Dr. Lawan

Thanadsillapakul

Legal Impediments

• Restrictions on investment• Restrictions on capital repatriation• Restrictions on industrial sectors• Restrictions on bureaucratic procedures• Restrictions on TRIMs – Trade-related

investment Measures• Restrictions on investment protection• Restrictions on Taxation and fees

to ensure that foreign companies will be treated as favourably as national of host country and their competitors

to protect FDI from direct and indirect expropriation of investments and ensure that foreign investors will be fairly compensated

to ensure free transfer of funds into and out of the host country using the market rate of exchange .

to limit the ability of the host government to require foreign investors to adopt investment measures

to ensure the right of foreign investors to submit an investment dispute with the treaty partner’s government to international arbitration

to give foreign investors the right to engage the top managerial personnel of their choice, regardless of nationality

to ensure the use of labour regardless of nationality

The New FTA Model Prof. Dr. LawanThanadsillapakul


Legal frameworks governing foreign investment

Domestic Laws and regulations International Law International Codes of conduct, Guidelines Treaty Regime (BITs, Regional Treaty,

Multilateral Treaty) WTO Rules and Regulations relating to

investment Special regime for investment liberalisation Unilateral liberalization of investment


Legal frameworks governing FDI at the international sphere

International Law- Traditional recognized absolute State sovereign rights- Diplomatic protection- State responsibility- Minimum international standard of treatment

International Codes and Guidelines, soft law The role of WTO

- Multilateral Investment Agreement- General Agreement on Trade related-investment measures (TRIMs)- The General agreement on trade in services (GATs)- General Agreement on Trade-related intellectual property rights (TRIPs)

Regional economic integration : EU, NAFTA, ASEAN (regional level)


Investment Treaty Regime

Bilateral Investment Treaty

Regional investment treaty

Multilateral investment treaty

Bilateral Free Trade Agreement


The scope of investment agreement

The scope of investment agreements is defined primarily through definitions of key terms, such as “investment” and “investor”.

The critical functions of the definition are the identification of assets to which the treaty applies

The determination of the nature of the obligations created by the treaty


Coverage of the Treaty/Agreement

Territorial Coverage- Federal State- Single State- State Parties- Third Parties

Personal Coverage- Investor: Juristic person, Natural Person


Coverage of the definition Investment

Is the term defined by reference to types of assets that, in theory, could amount to an “investment”?

Or does one also refer to the underlying transaction in which those assets are involved?

Investor

Is this term defined by reference to categories of legally recognized persons?

Or on the basis of the transactions involved, regardless of the legal status of the person or entity undertaking that transaction?


Definition of Investment

The broad asset-based definitions of investment

The narrow asset-based definition

The enterprise-based and transaction-based definition


Investment Any kind of asset

Movable and immovable property

Interest in the companies ( both portfolio and direct investment, but generally portfolio and short term investment would be excluded)

Contract rights (service agreement)

Intellectual property

Business concession

Each of these types of investment has different economic and development implications for host and home countries


The Broad Asset-based Definition of Investment

Property: tangible property, merchandise Property rights: mortgage, lien, pledge,

company’s interest, debt, equity, debenture, bonds, portfolio investment

Contractual rights: professional services, turnkey contract, insurance policy, contract for sale of goods or services, claims to money

Intellectual property rights: trademarks, trade secret, patent, copyrights, technical process, know-how, good will

Business concession rights: resources concession


The Narrow asset-based definition

Limitation to permitted investment

Limitation on time of establishment

Limitation on nature of the investment, i.e. only FDI or indirect investment (port folio)

Limitation to size, sector: energy

Prof. Dr. LawanThanadsillapakulThe enterprise-based

Establishment & acquisition of an enterprise

Shares of enterprise

Transaction-based

Transaction of establishment

Liquidation of enterprise not asset


The term “investment” and its interaction with other related issues

Investment and admission and establishment

Investment and National Treatment and Most-

Favoured-Nation Treatment

Investment and incentives

Investment and full protection and security

Investment and taking of property

Investment and funds transfer

Investment and dispute settlement

Prof. Dr. LawanThanadsillapakulDefinition of Investor

Entities considered investors- Exclusions based on legal form- Exclusions based on purpose- Exclusions based on ownership

Establishing the link- Natural persons- Legal entities

Nationality of enterprise/legal entity- Seat of the enterprise/company- Incorporation place- Controlling Shareholder


Admission & Right of Establishment

State’s sovereign Rights

The form of Controls or restrictions over the

admission and establishment of foreign investor

The acquisition of interests in local business

The limitations on foreign ownership and control

Registration and report requirements

The conditional entry of foreign investors:

investment measures, incentive regimes, economic

policy


Sovereign Rights of Host Country to admit and control foreign investment

Pre entry

Pre-entry treatment

Total Exclusion

Exclusion from negative list, sensitive list, closed sectors

Screening

Quantitative restriction

Conditional entry

Restricted allocation

Etc.

Post entry

Post- entry Treatment

Form of establishment

Ownership control

Governmental intervention

Special requirements

Other Restrictions

Control over the operation of MNEs

Expropriation/ Nationalization

Etc.


Measures relating to admission and establishment

Control over access to the host country economy

Conditional entry into the host country economy

Control over ownership

Controls based on limitation of shareholder powers

Control based on governmental intervention in the running of the investment

Other types of restriction

Measures relating to ownership and control


Control over access to the host country economy

Absolute ban on all forms of FDI: Former centrally – planned economies prior to the transitional process.

Closing certain sectors, industries or activities to FDI for economic, strategic or other public policy reasons.

Quantitative restrictions on the number of foreign companies admitted in specific sectors, industries or activities for economic, strategic or other public policy reasons.

Investment must take a certain legal form: incorporation in accordance with local company law requirements.

Compulsory joint ventures either with state participation or with local private investors.


Control over access to the host country economyGeneral screening/authorization of all investment

proposals; screening of designated industries or activities, screening based on foreign ownership and control limits in local companies.

Restrictions on certain forms of entry: mergers and acquisitions may not be allowed, or must meet certain additional requirements.

Investment not allowed in certain zones or regions within a country.

Admission to privatization bids restricted, or conditional on additional guarantees, for foreign investors.

Exchange control requirements.


Conditional entry into host country: General conditions

Conditional entry upon investment meeting certain development or other criteria (environmental responsibility, benefit to national economy) based on outcome of screening evaluation procedures

Investors required to comply with requirements related to national security, policy, customs, public morals as conditions of entry.


Condition based on capital requirement

Minimum capital requirements.

Subsequent additional investment or reinvestment requirements

Restrictions on import of capital goods needed to set up investment ( e.g. machinery, software) possibly combined with local sourcing requirements.

Investors required to deposit certain guarantees ( e.g. for financial institutions)

Prof. Dr. LawanThanadsillapakulOther Conditions

Special requirements for non-equity forms of investment (e.g. BOT agreement, licensing of foreign technology).

Investors to obtain licenses required by activity or industry specific regulations

Admission fees ( taxes) and incorporation fees (taxes)

Other performance requirements ( e. g. local content rules, employment quotas, export requirements).


Measures relating to ownership and control: Control over

ownership

Restrictions on foreign ownership : no more than 50% foreign-owned capital allowed.

Mandatory transfers of ownership to local firms usually over a period of time ( fade-out requirements).

Nationality restrictions on the ownership of the company or shares thereof


Control based on limitation of shareholder powers

Restriction on the type of shares or bonds held by foreign investors e.g. shares with non-voting right

Restrictions on the free transfer of shares or other propriety rights over the company held by foreign investors e.g. shares cannot be transferred without permission.

Restrictions on foreign shareholder rights e.g. on payment of dividends, reimbursement of capital upon liquidation, on voting rights, denial of information disclosure on certain aspects of the running of the investment.


Controls based on governmental intervention in the running of the investment

Government reserves the right to appoint one or more members of the broad of directors.

Restriction on the nationality of directors, or limitations on the number of expatriates in top managerial positions

Government reserves the rights to veto certain decisions, or requires that important board decisions be unanimous

“Golden” shares to be held by the host Government allowing it, for example, to intervene if the foreign investor captures more than a certain percentage of the investment

Government must be consulted before adopting certain decisions.


Host Country’s General post-entry Control over FDI

Control over Capital movements

Control through tax legislation

Control through disclosure legislation

Control through “merger” legislation

Control over operations resulting in divestment

Dispute Settlement

Expropriation - Traditional concept

- Creeping expropriation


Related issues to Host’s country control

Definition of investment : the limitation of power of the host country to control or to allow greater discretion to the host state to control FDI

Exceptions and derogations: national security, public health, public policy, specific industries

Incentives National treatment and most favoured-nation

treatment Social responsibility Transparency Dispute settlement


Other types of restriction

Management restrictions on foreign- controlled monopolies or upon privatization of public companies.

Restrictions on land or immovable property ownership and transfers thereof.

Restrictions on industrial or intellectual property ownership or insufficient ownership protection.

Restriction on the use of long-term (five years or more) foreign loans e.g. bond


Country Approaches to entry and establishment of FDI

The “Investment Control” model, which preserves full State Control over entry and establishment;

The “Selective Liberalization” model, which offers limited rights of entry and establishment, i.e. only in industries that are included in a “positive list” by the agreement of the contracting States;

The “Regional industrialization programme” model, which offers full rights of entry and establishment based on national treatment for investors from member countries of a regional economic integration organization only for the purposes of furthering such a programme


Country Approaches to entry and establishment of FDI

The “Mutual national treatment” model, which offers full rights of entry and establishment based on national treatment for all natural and legal persons engaged in crossed-border business activity from member countries of a regional economic integration organization;

The “Combined national treatment/most-favoured-nation treatment” (NT/MFN) model, which offers full rights of entry and establishment based on the better of NT or MFN, subject only to reserved “negative” lists of industries to which such rights do not apply.

Prof. Dr. LawanThanadsillapakulTransfer of Funds

Conditional fund transfer- Balance of Payment

- Financial Crisis

- Short term Capital control

Free/Liberal fund transfer


Returns

The earnings from investment The elements of the term returns mirror the

element of the term investment

To identify the extent of covered return to be protected under the treaty


Commodity – Based Input TRIMs

Local content requirement

Laws of similar

Minimum export requirement

Trade – balancing requirement

Limitation on import

Foreign- exchange restriction

Prof. Dr. LawanThanadsillapakulFactor – Based Input TRIMs

Local content requirement

Local - equity requirement

Technology transfer requirement

Research & Development requirement

National participation in management

Local hiring target

Expatriate quota


Commodity – Based Output TRIMs

Minimum – export requirement

Trade balance requirement

Export control

Market reserve policy

Product mandating requirement

Licensing requirement

Export performance requirement

Domestic sales requirement

Manufacturing Limitation

Manufacturing requirement


Factor – Based Output TRIMs

Technology transfer

requirement

Earning Remittance Limits

Prof. Dr. LawanThanadsillapakulTreatment to foreign investor

Pre-establishment

Post-establishment


National Treatment

The nature and origins of the national treatment standard

Scope and application

The substantive content of the national treatment standard

The relationship between national treatment and other general standards of treatment

“De jure” and “de facto” treatment

Exceptions to national treatment


Definition

National treatment can be defined as a principle whereby a host country extends to foreign investors treatment that is at least as favourable as the treatment that it accords to national investors in like circumstances.

In this way the national treatment standard seeks to ensure a degree of competitive equality between national and foreign investors.


The nature and origins of the NT standard under International Law

The standard represents one of the competing international law doctrines for the treatment of the person and property of aliens “The Calvo Doctrine” or the so called “Negative National Treatment”

The doctrine of State Responsibility for injuries to aliens and their property. It asserts that customary international law establishes a minimum international standard of treatment to which aliens are entitled, allowing for treatment more favourable than that accorded to nationals where this fails below the international standard

Prof. Dr. LawanThanadsillapakulGeneral application of NT

National treatment typically extends to the post-entry treatment of foreign investors.

Some international investment agreements also extend the standard to pre-entry situations. (US and Canada BITs)

Normally such an extension accompanied by a “negative list” of excepted areas of investment activity to which NT does not apply, or a “positive list” of areas of investment activity to which NT is granted.

Several types of general exceptions to national treatment exist concerning public health, safety and morals, and national security.


National Treatment VS MFN Treatment

National treatment seeks to grant treatment comparable to domestic investors operating in the host country. (to secure a certain level of treatment for FDI in host country)

NT serves to eliminate distortions in competition and thus is seen to enhance the efficient operation of the economies involved

MFN seeks to grant foreign investors treatment comparable to other foreign investors operating in the host country


The differences of NT that applicable to trade and investment

National Treatment in trade agreement is applicable to “Product”

The national treatment in investment agreement is applicable to “investments” and/ or “investors”

Prof. Dr. LawanThanadsillapakul“De jure” and “De facto” NT

De Jure NT, the treatment of foreign investors based on NT provided under national law and regulation or under the investment treatment

De facto NT, the treatment of foreign investors under the factual measures that might work against NT e.g. licensing requirements, qualification requirements. Although these measures may be justified on policy grounds.


Exceptions to National treatment

Classification of exceptions

General exceptions

Subject-specific exceptions

Industry-specific exceptions

Reciprocal national treatment clauses

Exceptions based on development considerations

Prof. Dr. LawanThanadsillapakulExceptions to national treatment

General exceptions: public health, order and morals, and national security

Subject-specific exceptions: intellectual property rights guaranteed under IP conventions, taxation, prudential measures in financial services, incentives, safeguards, cultural industries exception

Country specific exceptions: specific industries for national economic policy and social policy

Reciprocal national treatment clauses

Exceptions based on development considerations

Monitoring

Prof. Dr. LawanThanadsillapakulMost-Favoured-Nation Treatment

Definition and scope

MFN treatment and equality of competitive opportunities

The “free rider” issue

The identity issue

Exceptions: general exceptions, reciprocal subject-specific exceptions, country-specific exceptions


The rationale behind the application of MFN to foreign investors

The most-favoured-nation treatment (MFN) standard is a core element of international investment agreements. It means that a host country treats investors from one foreign country no less favourably than investors from any other foreign country in like cases.

The MFN standard gives investors a guarantee against certain forms of discrimination by host countries, and it is crucial for the establishment of equality of competitive opportunities between investors from different foreign countries.

Prof. Dr. LawanThanadsillapakulExpropriation

Direct expropriation

Indirect expropriation /Creeping expropriation

- Taxation

- Disguised Environmental Measures

- Di-vestment

- Conditional fund transfer

- Legal Enforcement

- etc

Prof. Dr. LawanThanadsillapakulIntellectual property Rights

Ex.

- Berne Convention

- Rome Convention

- TRIPs Art. 4 (6) (protection of reciprocity Rule)

- NAFTA Art. 1108 (5) (not limited to protection of reciprocity but applies to IP rights in general


Abuse of intellectual property rights

Abuse of intellectual property rights (IPR), for example where technology-licensing arrangements abuse the monopoly position of IPR holders, such as through non-competition clauses and the so-called ‘grant back’. This means the licensee is required to assign inventions made in the course of working on the transferred technology back to the licensor. Another aspect of IPR abuse, “non-contestation clauses” is that the licensee is prevented from contesting the validity of the IPR or other right of the licensor. IPR abuses might be subject to general competition rules on horizontal and vertical restraints.

Prof. Dr. LawanThanadsillapakulDispute Settlement

State – State Dispute settlement

State – Investor Dispute settlement

Prof. Dr. LawanThanadsillapakulDispute Settlement

Judicial System

Arbitration


Investment Promotion

Prof. Dr. LawanThanadsillapakulInvestment Incentives

Tax Incentives

Non – Tax Incentives

Prof. Dr. LawanThanadsillapakulTax Incentives

An inducement offered in the form of an abatement of taxes such as:

Tax holiday from corporate income tax

Exemption from income tax, custom duty, corporate tax, Business levy, withholding tax on remittance of profit, dividends and other distribution

Tax holiday from dividends tax

Tax allowance

Concession from duty/levy

Abatement of adjusted income

Double deduction

Tax credit

Deduction for labour cost

Deduction cost of construction

Capital Loss Carry forward

Loss write-off provision

Any kind of tax exemption

Prof. Dr. LawanThanadsillapakulNon – Tax Incentives

The incentives offered by the government to induce trade and investment either from abroad or domestic, or both sources. But they are not in a form of tax abatement such as:

One-stop services Favourable trade and investment environment Good Public infrastructure Telecommunication Network Favourable legal framework Investment Subsidy


Competitiveness

Capital

Technology

Management

Consumption Behavior

Global network, Global chain


Anti-competitive business practices

Horizontal restraints

Vertical restraints


Abuse of market dominance

Mergers and acquisition policies

Public undertakings and enterprises with special

privileges

Prof. Dr. LawanThanadsillapakulHorizontal restraints

Horizontal restraints or the hard-core cartels among firms in an oligopolistic market, engaging, for example,

in price fixing,

output restrictions,

market division,

customer allocation, and

collusive tendering and

other anti-competitive co-operation between firms selling competing products.

Prof. Dr. LawanThanadsillapakulVertical restraints

Vertical restraints or distribution strategies between manufacturers, suppliers or distributors, such as:

tying the sale of one good as a condition for the purchase of another good;

exclusive dealing (the seller requires the buyer to purchase the products only from the seller);

Prof. Dr. LawanThanadsillapakulVertical restraints

territorial restraints (the seller requires the buyer/distributor to resell the product within a limited geographical area);

and resale price maintenance (the seller requires the buyer to resell the product only at a specified price).

Resale price-fixing also tends to be generally prohibited. The pro- and anti- competitive effects of such vertical restraints need to be evaluated and where necessary controlled.



Abuse of intellectual property rights (IPR), for example where technology-licensing arrangements abuse the monopoly position of IPR holders, such as through non-competition clauses and the so-called ‘grant back’. This means the licensee is required to assign inventions made in the course of working on the transferred technology back to the licensor. Another aspect of IPR abuse, “non-contestation clauses” is that the licensee is prevented from contesting the validity of the IPR or other right of the licensor. IPR abuses might be subject to general competition rules on horizontal and vertical restraints.


Abuse of market dominance

Abuse of market dominance: dominant firms accounting for a

significant market share may attempt to monopolise a market,

for instance through price discrimination,

predatory low prices,

refusal to deal, or

vertical restraints.

Rules against the abuse of a dominant position may be

conduct-oriented, in other words, a general prohibition against

monopolising and foreclosure of competition. Another

approach is result-oriented, with a prohibition for example of

predatory pricing only if the losses can be recouped.

Prof. Dr. LawanThanadsillapakulMergers and acquisition policies

Mergers and acquisition policies, where horizontal, vertical or conglomerate mergers, may reduce competition or decrease efficiency. Merger policies may be designed to ensure the contestability of markets by preventing monopoly or price-setting by a single seller and price-taking by a single buyer, as well as oligopolistic or monopolised market power. On the other hand, acquisition policies also overlap with industrial policy instruments.


Public undertakings and enterprises with special privileges

Public undertakings and enterprises with special privileges, which are not required to behave according to market principles, (GATT Article XVII and EC Treaty Article 90) in view of their market power or financial independence. This includes firms with exclusive trading rights and monopolies.


The Impacts of FTA on state sovereignty

The impact on Legislation

The impact on Judicial System

The impact on the Enforcement of Law and

Regulations

The impact on Administrative System

The impact on Territorial Jurisdiction

The impact on Personal Jurisdiction


Fundamental impact of FTA on Environment

Sovereign Rights

Legal Enforcement

Over exploitation

Prof. Dr. LawanThanadsillapakulNegative impacts of FTA

Agriculture: the instability of the international price of agricultural commodities, Lower agriculture returns are linked to poverty, a major cause of environmental degradation

Energy: to mitigate climate change , over-exploitation

Fisheries: over-exploitation and illegal, unreported and unregulated fishing.

Forestry: the mitigation of global warming and the conservation of biological diversity, illegally harvested forest products, the illegal exploitation of forestry resources, illegal logging

The areas need careful liberalization

• Intellectual Property Rights Protection

• International Investment rules

• Trade – related investment Measures

• The Treatment of Foreign Investors

• The liberalization of Trade in services

• Mutual Recognition

The sustainable development

• To balance State sovereignty and Market• To balance Liberalization and the

conservation of natural resources and environment

• To generate wealth of the local people• To evenly distribute income throughout the

country and the world• To maintain cultural way of life and local

wisdom

Environment protection: Development –Related Issues and sustainable development

• Eco-System• Climate Change, Ozone Layer, Air Pollution Control,

Noise Abatement, Water Protection and water management, Waste and Waste Management, Soil Protection, Chemicals and Environment Risks

• Preservation of Natural Resources• Bio Diversity, Gene Technology and Environmental

Risks• Social and Economic environment• Regulatory Environment• Warning System for environment problem, production

process, sustainable consumption and the effective environment Measures


Thank you

Prof. Dr. Lawan Thanadsillap akul Investment Liberalisation under FTAs and Some Legal Issues in International Law Prof. Dr. Lawan Thanadsillapakul.

Documents

investment restrictions

investment dispute

investment chapter

bilateral investment

investment liberalization

investment measures

investment special regime

scope of investment